The Cattleman’s Advisory 7/01

Fundamentally

For the cattle markets, we heard reports late last week of 200 dressed cattle trading again as the cutouts fall toward 200 dollars in the choice cutout market. Cash cattle are beginning to trade week to week in larger trading price blocks. There is very little support for the value of a fed steer to change from $116 the previous week to $123 in the current week. The reason for the volatility is simple — poor liquidity amidst a grain price selloff. We are discovering price for a small pool of cattle, generally less than 10% of total fed cattle production in a week, and anytime you trade a restricted amount of transactions in a much larger market, the natural bi-product is volatility. The cash price for cattle is determined by those 10% for the other 90% and the CME has built a futures product off that subset of a market. Discovery right now is difficult but the fundamentals remain sideways, which is better than some other markets we know. Going forward, I expect more speculative interest in feeder cattle to pop into the story. Cheap grain prices will encourage usage and based off wheat, I think corn and eventually soymeal will give livestock producer’s wider margins to expand. The selling this morning is very speculative driven in the grains as extremely long corn positions unwind (bullish cattle) against the bearish GBP story.

Seasonally

Live Cattle: The 4th of July and beefs best demand seasonally is now complete. I will be very interested in the retail volume over the long weekend. With cash prices reported between 120 and 123 late Friday, basis has returned to a positive 7 to 10$, but that’s relative to the August Live cattle board. August Live Cattle contracts established new lows on 6/20, and over a two week period, were able to rally 6.5$. Friday the market sold off but I am willing to assume that was a function of market participants exiting positions before the long holiday weekend. If this assumption is correct, we should see buyers re-entering the market fairly early Tuesday morning. If the supporting up trend line fails Tuesday, on can assume that there was more to the selloff then just weekend profit taking. Technically Live Cattle have not produced a strong bottom signal and a failure next week will leave our two week rally looking very much like a 3 wave correction higher, followed by more downward selling pressure. We are watching our existing August Live Cattle puts, and will alert clients as they get close to being able to roll them up or down. Just watching for now.

Feeder Cattle have a good amount of seasonal upside left to them (June-technically out to August but in my opinion less reliable after the 4th of July). That’s relative to time, not necessarily to price. As of today, Feeders are moving counter seasonal, at least for now.

Technically

August Feeders: August feeders established a new yearly low on 6/20 at 134.25. By Friday (7/1) they had rallied to a high of 145.1. Friday saw relatively substantial selling in feeders, but at least for now, I am willing to attribute that to traders exiting the market before the long weekend. As with live cattle, we should see buyers re-enter the market fairly early Tuesday if this assumption is correct. If feeders can penetrate and close above the down trend line at 145, I feel it is reasonable to see 148 and even hope for 152. To maintain the momentum feeder’s have built the last two weeks, we need to be well on our way towards 148 by mid-week. As was the case a month ago on the last rally attempt, if we stall the bulls will lose confidence and the bears will re-assert their dominance.

As with live cattle, I do not see the telltale technical signs of a major bottom in feeders. A short term bottom that gets us through the rest of the summer would not be a surprise. I would aggressively forward contract 2016 production on rallies between now and the 10th of August, and look to re-own with calls. You just never know what the future may have in store for us.

Short term trend is Neutral. Above 145 cancels the first minor down trend line and shifts to the minor up trend line. Remember, the overall major trend is very bearish.

Moving averages are negative.

Down Side Targets

The yearly low of 134.25

Wedge break out projections at 133

2012 and 2013 lows of 131.5

Topside Targets

Top side of the wedge we broke down and out of presently sits around 145 (red diagonal line).

The nearest top side resistance sits at 148.5. I will want to see that penetrated before I worry about the next higher level.

Hedging Strategy

In the Money May hedges were exercised at expiration on May 26

We recommended purchasing August puts on a downside breakout of a minor wedge. Unfortunately, we gapped out of that wedge (in orange on the chart) and our fill was not as good as one would hope. I ended up buying 141 August puts for 5$ on the open Monday (5/23). On 5/31 we rolled 141 puts up to 144 puts, utilizing the aggressive 1:3 ratio mentioned in this letter. Superior Video had Montana’s first big auction sale for fall delivery calves. The cash basis was much weaker than I was expecting or hoping for, coming in at about plus $6 on a 625lb calf. I begrudgingly accepted that as an established fact, and forward contracted ¾ of my 2016 production after the video auction. A week later, Northern video saw the basis on a 625 lb fall delivery calf decline to roughly even to plus $2. For clients not forward contracted, I would continue to leverage the protection offered from the 144 puts. We will be working the math on rolling the 144s up or down as we progress forward.

Mr. Payne has mentioned several times that the cattle market is overweight with shorts. He is absolutely correct and at some point that fact will cause a violent correction higher as all the shorts try to exit at the same time. However, timing the exact moment the short trap is triggered can be perilous and very frustrating. Out of respect for that day coming, I re-owned my 2016 sold production with 141 calls about 2 weeks ago. With August futures at 145, even though it was one of my topside targets, the math simply did not make sense and I am forced to risk the calls to at least 148. At this time, I have not decided the best course of action IF the market reaches 148. We will be watching the markets behavior as/if we approach this level. Subscribers will be sent an email update when we decide the best course of action.

Contact one of the listed Daniels Trading brokers below for ideas on where to initiate hedges if your 2016 production is not already covered .

August Feeder chart sourced from RJO Vantage 7/1/2016

August Live chart sourced from RJO Vantage 7/1/2016

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This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.